A truism of investing is that there is no return without risk. In general, the higher the perceived risk, the higher the future returns. If the stock market seems especially risky, that probably bodes well for future returns. We believe the global economy is self-healing. When there’s a fissure in the system, the components of the system identify, respond and fix the system. So relax, focus on what you can control and stay the course on your investing strategy.
About 20 years ago, I was a defense stock analyst and, as part of my research efforts, attended a Defense Research Projects Agency (DARPA) conference. DARPA is probably most famous for its role in developing the Internet, but it’s involved in all kinds of gee-whiz, cutting-edge technology development. One of the projects highlighted at the conference was a “self-healing” minefield. The concept is a system of networked mines serving as an obstacle between friendly and enemy forces. If the enemy “breaches” the minefield, creating a clear path toward friendly forces, the networked mines react by—and this is where I really wish I could find a YouTube video from the conference—hopping toward the gap and healing the breach. The networked mines could also be remotely deactivated after conflicts to avoid the devastating civilian toll of abandoned, unexploded ordnance. It was all pretty mind-blowing at the time.
I am always reminded of the self-healing minefield when I talk to clients about potential risks to the long-term health of the economy and the stock market (e.g., the U.S. defaulting on treasury debt, a collapse of the banking system, and/or sustained, high inflation). We strongly encourage our clients to “set it and forget it,” by establishing appropriate savings rates and stock/bond mixes. From there, they periodically rebalance and maintain the strategy through good and bad times. “But what if”, say the nervous Nellies, the world changes and the global economy is fundamentally different? Is there a time when we need to abandon our long-term ‘set it and forget it’ plan?”
The short answer is no. The longer answer is that when you are most anxious and fearful about the future, is exactly when you will benefit most from being steadfast. In early March 2009, the global economic outlook seemed bleak. The housing market was collapsing, the banking system was tottering because of housing-related debt and derivatives (sort of side bets on the debt), and GDP was contracting. Not only that, sovereign debt was high from mounting U.S. debt related to an expensive war, and the U.S. was going through a major political transition. It was scary.
Over the next few years, though, the global economy self-healed. The complex, interconnected system of countries, companies and people responded to the “breach,” by hopping to fix problems and take advantage of opportunities. Countries adjusted monetary and fiscal policies. Companies adjusted operations and tightened their belts, implementing solutions enabled by Internet technology developed in the late 90s and early 00s but deemed not urgent in better times. The world adapted and, mostly, healed. The stock market started to go straight up and the S&P 500 is up more than fivefold since then.
Could you have done even better than setting it and forgetting it in the 2008-2009 time frame? Maybe by selling in September 2008 and then buying back in March 2009? Sure, it’s always easy in retrospect. But it’s very, very hard—some would say nearly impossible—to outguess the collective wisdom of the stock market at a point in time. During these periods of market volatility, it’s wiser to just stay the course.